BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF COLORADO Docket No. 11A-325E _____________________________________________________________________ IN THE MATTER OF THE APPLICATION OF PUBLIC SERVICE COMPANY OF COLORADO FOR A CERTIFICATE OF PUBLIC CONVENIENCE AND NECESSITY FOR THE PAWNEE EMISSIONS CONTROL PROJECT ________________________________________________________________________ NOTICE OF CHANGES IN THE COAL INDUSTRY AND IMPLICATIONS FOR THE PAWNEE EMISSIONS CONTROL PROJECT _____________________________________________________________________ I. INTRODUCTION ............................................................................................................................... 2 II. BACKGROUND ................................................................................................................................ 2 III. RECENT CHANGES IN THE COAL INDUSTRY ........................................................................ 4 A. PATRIOT COAL FILED FOR BANKRUPTCY ON JULY 9, 2012 ............................................................. 5 B. ALPHA NATURAL RESOURCES—A KEY SUPPLIER TO THE PAWNEE COAL PLANT—ALSO HAS SERIOUS FINANCIAL PROBLEMS.......................................................................................................... 6 C. ARCH COAL INC —OWNER OF THE LARGEST US COAL MINE, THE BLACK THUNDER MINE— ALSO HAS SERIOUS FINANCIAL PROBLEMS ...................................................................................... 16 D. OTHER US COAL COMPANIES ARE GENERALLY SUBJECT TO THE SAME GEOLOGICAL AND FINANCIAL CONDITIONS THAT ARE AFFECTING ARCH COAL INC. AND ALPHA NATURAL RESOURCES .......................................................................................................................................................... 21 E. SEVERAL COAL PLANTS HAVE DECLARED BANKRUPTCY OR BEEN MOTHBALLED IN THE LAST YEAR ................................................................................................................................................. 23 a. AES Eastern Declared Bankruptcy Citing the Economics of Coal ......................................... 23 b. Maryland Coal Plants Sold at a Loss ...................................................................................... 24 c. Largest Coal Plant in Ohio Put on Standby Due to Economics of Coal .................................. 24 IV. PAWNEE COAL COSTS APPEAR TO BE RISING FASTER THAN PREDICTED BY XCEL .............................................................................................................................................................. 25 V. SUMMARY ...................................................................................................................................... 26 1 I. INTRODUCTION This Notice of Changes in the Coal Industry and Implications for the Pawnee Emissions Control Project, (hereafter “Notice of Changes”) is being filed to notify the Commission and other parties of significant changes in the coal industry that have occurred in recent months and which suggest that the prudent path is to reconsider making a $250 million investment in pollution controls for the Pawnee coal plant. This “Notice of Changes” is being filed after Xcel filed a “Semi-Annual Progress Report” on the Pawnee Emissions Control Project that was not filed at the request of the Commission. If Xcel chooses to withdraw its Semi-Annual Progress Report, then Ms. Glustrom will withdraw this Notice of Changes. The following information is provided for consideration by Xcel, the Commission, and other interested parties: II. BACKGROUND This docket is related to the Application of Public Service Company of Colorado (“PSCo” or “Xcel” or the “Company”) for a Certificate of Public Convenience and Necessity (“CPCN”) for the Pawnee Emissions Control Project. “Pawnee” is a 505 MW coal plant located northeast of Denver in Brush, Colorado. It was built in 1981. Hearings in this docket were held in October 2011. Statements of Position were due on October 28, 2011 and the Recommended Decision of the Administrative Law Judge, R11-1257, was mailed on November 22, 2011. The Commission’s decision granting the CPCN for the Pawnee Emission Control Docket, Decision C12-0159 was issued on February 14, 2012. The Commission decision denying Applications for Reargument, 2 Reconsideration and Rehearing (“RRR”), Decision C12-0345, was issued on April 3, 2012. On September 20, 2012, Public Service Company of Colorado (“PSCo” or “Xcel” or the “Company”) submitted a “Semi-Annual Progress Report (Corrected)— Pawnee Emissions Control Project” through the Colorado Public Utilities Commission (“PUC” or “Commission”) “E-Filing” system.1 This report was not provided at the request of the Commission and was submitted about 11 months after the record in this docket was closed in October 2011. Xcel’s Semi-Annual Progress Report provided the following statement regarding the filing of the Report: An issue of project status reporting arose in the various CPCN proceedings of whether the Company would be willing to provide reports to the Commission and interested parties updating them of the Company’s progress towards the completion of these projects. We indicated our willingness to do so and specified the information that we intended to report. Although the Commission has declined to require us to provide these reports, we believe that these reports provide useful information and that by providing this information now, we may lessen concern in subsequent rate cases regarding the costs of these projects. (Xcel Semi-Annual Progress Report (Corrected) Pawnee Emission Control Project, September 20, 2012, page 1. Emphasis added.) As noted by Xcel, the Commission did not ask for these semi-annual progress reports for the Pawnee Emission Control docket, but Xcel believes that filing these 1 An earlier version of the Semi-Annual Progress report was filed on August 14, 2012, but apparently another party (who was not identified) contacted Xcel and objected to the way the report was presented. The Corrected version was subsequently filed on September 20, 2012. The Notice filed on September 20, 2012 described the situation as follows: Public Service Company of Colorado filed its Semi-Annual Progress Report in this and other Clean Air Clean Jobs Act implementation proceedings on August 14, 2012. In response to these filings, a party contacted us informally and expressed the view that certain of our characterizations in the report of the Commission’s actions in these proceedings were in its view inaccurate. We agreed we would file corrected versions of our reports to address its concerns. 3 reports “may lessen concern in subsequent rate cases regarding the costs of these projects.” In short, it appears that Xcel may be trying to “pave the way” for future cost recovery by filing these unrequested semi-annual progress reports after the close of the record in this docket.2 Importantly, as discussed below, there are very significant changes occurring in the U.S. coal industry. As the entity managing the Pawnee Emission Control Project, Xcel should be monitoring these changes in the coal industry and taking a hard look at whether spending approximately $250 million on pollution controls for the Pawnee coal plant with the intent to keep it operating until 2041 is a prudent action given what is now known about the U.S. coal industry and the cost of producing coal and the implications of these changes for ratepayers (and shareholders) who could be held responsible for paying for the Pawnee Emissions Control Project and/or for future fuel costs for the Pawnee coal plant. III. RECENT CHANGES IN THE COAL INDUSTRY Many changes have occurred in the U.S. coal industry since the Commission issued its decision on Applications for Rehearing, Reargument and Reconsideration, C12- 0345 on April 3, 2012. These changes call into serious question whether Xcel will be able to acquire a reasonably priced supply of coal for the Pawnee coal plant until the expected retirement date of 2041. 2 In C12-0345, the Commission noted that when Xcel comes to the Commission for cost recovery, Xcel “will enter into that proceeding with a general presumption of prudence regarding its expenditures.” (C12-0345, ¶ 11, page 3) 4 In short, given information that Xcel either knows or should know at this point, it is increasingly clear that attempting to keep the Pawnee coal plant operating until 2041 is not likely to be a prudent course of action. These recent changes in the US coal industry (including rising production costs, declining margins, serious financial distress and bankruptcy for a top coal producer) are summarized below. A. Patriot Coal Filed for Bankruptcy on July 9, 2012 Patriot Coal, one of the largest thermal coal companies in the eastern United States, was formed from the spin-off of coal assets and operations of Peabody Energy in West Virginia and Kentucky.3 The Articles of Incorporation for Patriot Coal were signed on May 10, 2007.4 While Patriot Coal’s stock (ticker symbol PCQCX) traded for over $80 a share in June 2008,5 a variety of debt and other financial problems, including the inability to refinance debt due in 2013, led to the serious erosion of stock value for Patriot Coal and Patriot’s filing for bankruptcy on July 9, 2012. In early October 2012, Patriot’s stock price is valued at less than 20 cents/share, Standard and Poors gives Patriot Coal a corporate rating of D, it is uncertain whether the company will come out of bankruptcy or whether it will be liquidated,6